Do brokerage analysts' recommendations have investment value?

Article Abstract:

An analysis of new buy and sell recommendations of stocks by security analysts at major U.S. brokerage firms shows significant, systematic discrepancies between prerecommendation prices and eventual values. The initial return at the time of the recommendations is large, even though few recommendations coincide with new public news or provide previously unavailable facts. However, these initial price reactions are incomplete. For buy recommendations, the mean postevent drift is modest (+2.4%) and short-lived, but for sell recommendations, the drift is larger (-9.1%) and extends for six months. Analysts appear to have market timing and stock picking abilities. (Reprinted by permission of the publisher.)

Stocks, Stock prices, Return on investment, Rate of return

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The persistence of IPO mispricing and the predictive power of flipping

Article Abstract:

This paper examines underwriters' pricing errors and the information content of first-day trading activity in IPOs. We show that first-day winners continue to be winners over the first year, and first-day dogs continue to be relative dogs. Exceptions are "extrahot" IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders "flip" IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional. (Reprinted by permission of the publisher.)

Investment Banking and Securities Dealing, Investment Banking, Investment banks, Pricing, Going public (Securities), Initial public offerings

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Does risk sharing motivate interdealer trading?

Article Abstract:

We use unique data from the London Stock Exchange to test whether interdealer trade facilitates inventory risk sharing among dealers. We develop a methodology that focuses on periods of "extreme" inventories - inventory cycles. We further distinguish between inventory cycles that are unanticipated and those that are anticipated because of "worked" orders. The pattern of interdealer trade during inventory cycles matches theoretical predictions for the direction of trade and the inventories of trade counterparts. We also show that London dealers receive higher trading revenues for taking larger positions. (Reprinted by permission of the publisher.)

Securities and Commodity Exchanges, Security and commodity exchanges, Securities Exchanges, Stock-exchange, Stock exchanges, Exchanges, Risk management, London Stock Exchange PLC

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